Economies of scale

Economies of scale

• 1.
  Economies of Scale Refersto those advantages enjoyed by a firm when its production size expands. Prof. Marshall classified them into two: 1) Internal Economies – are those economies in production, those reduction in production cost which accrue to the firm itself when it expands it output or enlarges its scale of production. Types of Internal Economies
• 2.
  2) External Economies Theyare those advantages common and general for all the firms and arise with the expansion of the Industry as a whole. They are: a) Economies of concentration and localization b) Economies of information c) Economies of natural factors d) Economies of government policy e) Economies of vertical integration f) Economies of specialisation g) Economies of infrastructure
• 3.
  Economies of LargeScale production 1) Over-worked management 2) Over-production 3) Difficulties in decision making 4) Difficulties in co-ordination 5) Scarcity of input supplies 6) Financial difficulties 7) Labour diseconomies
• 4.
  Production function throughIso-Quant Analysis Iso-Quant is a concept which tells that the quantity produced will be the same inspite of variation in production input -Each combination is called a scale of preference -Iso-Quant means equal quantity -Iso-Quant curve indicates that each curve will have different scales of preference of inputs Iso-Quant is also known as Iso-Product curve or equal product curve Definition An Iso-Quant curve is that curve which shows the different combinations of two factors yielding the same level of output
• 5.
  Iso-Product Schedule It showsthe different combination of two input namely labour and capital which yield the same level of output.
• 6.
  Iso-Quant curve isalso called production Iso-Quant It explains that different combination of factor inputs would produce a given quantity of output -Iso-Quants describe production function of a firm -also suggest least cost combination of factor inputs with the help of Iso- Cost curves Properties of Iso-Quants -Convex to the origin -Slop downwards from left to right -Never intersect each other -Some times it will have an oval shape Marginal Rate of Technical Substitution (MRTS) -Produces substitute one input in the place of another in the production process MRTS is the rate at which one factor is substituted for another without changing the level of output
• 7.
  -The slope ofthe Iso-Quant curve is measured in terms of MRTS -In terms of inputs of capital K and Labour L L MRTS =  K Iso-Cost curves -is a line representing equal cost. -It shows all combination of inputs having equal total cost -They are stright lines – which means that the firm has no control over the prices of the inputs and the prices are the same irrespective of the units bought by the firm
• 8.
  The prices offactor inputs are given. Price of factor X is Rs.4 and factor Y Rs.5. With an outlay of Rs. 200 we can buy 50 units of X or 40 units of Y. The straigt line AB is the Iso-Cost line. If the outlay is increased then the Iso-line moves upward Equilibrium of the firm or Producer’s Equilibrium -A producer is in equilibrium when he is able to produce more output with a given outlay and/or given inputs - A rational producer may attain equilibrium either by maximizing output for a given cost or by minimizing cost -To determine producer’s equilibruim we should integrate an Iso-Quant map with an Iso-cost line -An Iso-Quant is the locus of all the combinations of two factors of production that yield the same level of output -Iso-Quant map refers to a group of Iso-quants each representing different levels of output.
• 9.
  -An Iso-cost linerepresents various combinations of two inputs that may be purchased for a given amount of expenditure. Maximisaton of output for a given cost Let AB (Iso-Cost line) represent given cost outlay IQ1, IQ2 and IQ3 are Iso-Quants representing three levels of output ie. 1000, 2000 and 3000
• 10.
  -IQ3 is notattainable because it is out of reach -In the above diagram the producer reaches the equilibrium point E where the Iso-Quant line is tangent to IQ2 -F and G cannot be equilibrium because they are lying on IQ1 and therefore by using OK of capital and OL of labour the producer reaches the highest level of production possible given the cost condition. Managerial uses of production function